New Decision On Lease Rejection Damages

This alert highlights a recent decision by Judge Michael E. Wiles in the Bankruptcy Court for the Southern District of New York ("SDNY"), which held that lease rejection damages should be calculated using the "time approach" rather than the "rent approach" — effectively reducing the maximum claim of landlords whose leases are rejected pursuant to section 365 of the Bankruptcy Code.¹

Rejection Damages

A landlord whose lease is rejected pursuant to section 365 of the Bankruptcy Code can assert a general unsecured claim comprised of prepetition arrearages plus "rejection damages." The "rejection damages" portion of the claim is subject to a statutory cap equal to the greater of rents due for (i) one year; or (ii) 15% of the remaining term, not to exceed three years.² Courts are divided as to whether the calculation pursuant to the second clause is: (i) 15% of the remaining rent under the lease (the "Rent Approach"); or (ii) 15% of the remaining time of the lease